Requirement vs. Choice: It’s the Crux in Claiming Commission Sales Expenses

In order to be eligible for a deduction for sales or travel expenses under subsections 8(1)(f) and (h) of the Income Tax Act, taxpayers must show that they worked on a commission-based income.

They must also prove that they were required by their employment contract to pay those expenses in conjunction with their employment and were not entitled to reimbursement from their employer for the expenses claimed.

In Tulman v. The Queen (2014 TCC 140)  the appellant asserted that although he did not receive commission income in the year in question, the available bonuses were akin to commission income and therefore should entitle him to deduct $16,580 for entertainment, gifts, and other items on a high end trip to Las Vegas.

The Court disagreed, drawing the distinction between being permitted to do something and being required to do something. Although the law allows deductions for tacitly understood obligations not expressly written in a contract, the payments must be a requirement and not a choice. The Court decided that it was the appellant's choice to incur the expenses that he did on his trip to Las Vegas and that while his contract of employment permitted them, it did not require him to incur the costs. Even if his ultimate goal was to earn a larger bonus, the Court held the expenses were not deductible.

What is interesting about this case is that the requirement to earn commissions was less important than the requirement to incur the costs under the contract of employment. This may in fact, strengthen claims for sales and promotional expenses required to be incurred by those who are compensated on salary only.

Greer Jacks is updating jurisprudence in EverGreen Explanatory Notes, an online research library of assistance to tax and financial professionals in working with their clients.